Out in the cold: Are providers doing enough to protect the vulnerable?

Pension providers run the risk of “cutting loose” vulnerable savers if they do not find better ways of monitoring signs of cognitive decline in ageing customers.

The pension reforms have handed customers “freedom and choice”, with FCA data showing a third of the 37,150 customers entering into drawdown between October and December opting to do so on a non-advised basis.

It is expected that this group of customers is only likely to increase.

The rising demographic of non-advised customers raises questions about how providers can be sure those who may have opted to control their own finances at retirement age remain able to do so as they get older. But how far should firms go to protect consumers from themselves?

Financial self harm

The FCA has been getting feedback on this issue through its Ageing Population discussion paper, which closed last week.

The paper formed part of a programme of work led by FCA life insurance and financial advice director Linda Woodall to establish a regulatory strategy aimed at the ageing population.

Age UK senior policy manager Christopher Brooks says the paper marks an ideal point for firms to begin working on procedures to protect their most vulnerable customers.

He says: “With pension freedoms the range of choices that people now have available means there’s a lot more scope for things to go wrong, so this is the kind of thing that the pensions industry will need to deal with much more effectively.”

Brooks says potential measures might include better training for frontline staff, and a broader re-evaluation of the language used in communicating with customers.

“If a customer is becoming vulnerable and there is a risk of financial self-harm, where does the boundary of responsibility lie?”

He adds: “Ultimately, these issues are only going to come up more frequently.”

Speaking at a recent MM Wired debate, Hargreaves Lansdown head of retirement policy Tom McPhail added it was important for firms to approach the topic with an open mind.

Hargreaves asks savers aged over 75 whether they would like to be joined in their meetings by a chaperone, such as a family member.

McPhail says: “Sometimes they take umbrage at that, and ask us what we’re talking about, but we picked an arbitrary age and that works to a degree as a safety mechanism, but that’s still dealing with customers doing drawdown on an advised basis.

“There’s a really interesting question about how you achieve those same kind of safety nets where someone is self-managing their investments.”

He adds: “If a customer is becoming vulnerable and there is a risk of financial self-harm, where does the boundary of responsibility lie with us in terms of where we should intervene?

“It might not be a major problem now but it’s something we need to put some serious consideration into, because it’s going to be significant for the industry as a whole.”

Buyers cut loose

Nonetheless, Fairer Finance founder James Daley questions how much thinking firms are doing to look into consumer vulnerability.

Daley says: “As the number of people in drawdown grows exponentially this is something that providers are going to have to keep an eye on, but I don’t imagine that most have given a lot of thought to it.

“There’s very much a ‘buyer beware’ culture around investment and once consumers have got through all the papers around managing investment and various disclaimers that they have to sign, they are sort of cut loose, and if you invest in something that costs you lots of money then that’s seen to be your problem.

“Generally the kinds of people who are investing large sums of money on their own have been sophisticated investors.

“So we might not have had many people fall into this trap yet, but the number of people making decisions for themselves is increasing, so it will become a future problem.”

Daley adds, for many firms, a solid start would be to expand the limited behavioural monitoring that is already likely to be taking place as part of fraud prevention.

He says: “Raising a few red flags when they see consumers stepping outside of their usual behaviour is good practice.”

But Threesixty managing director Phil Young cautions against placing too much focus on the role of a pension provider.

He says: “The danger is there is an increasing amount of responsibility being put on providers to marshal a lot of this stuff.

“There’s perhaps an over-reliance on providers here, which isn’t necessarily healthy. There is also the added problem that most pension providers are not privy to a lot of this information.

“Some providers make assumptions where people aged 75 or 80 are almost treated by default as vulnerable.

“And I don’t think any of that does any harm, but it’s hard to make any sort of more detailed assessment of a non-advised customer.

“I can see providers being put into a position where they have to come up with more of a default drawdown proposition on a non-advised basis.

“But then they will be accused of trying to steal clients by setting up a direct-to-customer proposition. So they can’t really win, and it’s difficult for everyone concerned.”

Young adds managing the issue of vulnerable clients requires understanding of the individual, which is easier where an adviser is involved because they will have had regular interaction with the client.

He says: “You can only ask providers to regularly contact their non-advised clients and remind them their plans may need reviewing.

“Cognitive decline is a gradual process and you can probably manage that risk with regular nudges, but if people aren’t going to read it, you can’t force them. And many providers will just see it as added costs.

“I don’t think the providers should be on the hook if consumers are saying they can manage it themselves.

“But fundamentally I just don’t know how far you go before you end up saying that you don’t trust anyone at any age.

Providers don’t give advice. It’s not their job. If clients are too stupid or unaware to realise the errors that they will make, then that’s their lookout. They should have gone to an adviser in the first place.

If the Government or the Regulator is worried about these numpties, then look to yourselves. The rules should have included a compulsion to see a qualified adviser before any drawdown contract is entered into. Indeed this rule should apply to any vesting for any pension above say £20k. In the event of any dispute over adviser fees, these could then be subject to the same conditions as the taxation of legal fees. (Taxation in this context does not refer to HMRC).